What Is Non-Owner Occupied?

Brick apartment building featuring three storeys and fire escapes

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Non-owner occupied mortgage loans focus on buildings with up to four residential units whose owners don’t live on the premises.

“Non-owner occupied” designates properties being financed by a person who will not be living there. The mortgage lending market has determined that loans for these investment properties are slightly more likely to go into default than homes that are someone’s primary residence. Therefore, correctly designating a property as owner occupied or non-owner occupied is vital in getting a mortgage loan whose interest rate is accurate to the circumstances.

Definition and Examples of Non-Owner Occupied

Non-owner occupied mortgage loans focus on buildings with up to four residential units whose owners don’t live on the premises. These loans may require slightly higher credit scores, significantly larger down payments, and higher interest rates than a primary residence mortgage.

Non-owner occupied loans are contrasted with loans for your primary residence. Many programs exist to help people afford to purchase a primary residence, but often, these loan products aren’t intended for investment properties.

Long-term rentals—such as a leased warehouse, an apartment building with up to four units, or a single-family rental home—are frequently non-owner occupied. Hotels, timeshares, and vacation rental properties in which the owner lives for more than 14 days of the year are generally considered owner occupied.

How a Non-Owner Occupied Loan Works

Non-owner occupied loans have a lot in common with other mortgage loans. Lenders keep track of default rates on different types of loans, and people are more likely—even in financial distress—to pay the mortgage on their own primary residence than to make sure their rental properties’ mortgages are fully paid each month. Most people will pay both, of course, but the slightly higher commitment to one’s primary residence is enough to prompt lenders to take steps to secure the risk of lending to non-owner occupants.

One way lenders create a higher level of security for themselves is to require a larger down payment. People who lie about their primary residence may be trying to get their investment property with a lower down payment in the 5%-10% range, while investment property that isn’t a primary residence usually has a 20%-30% down payment. There may be a higher credit score requirement to receive non-owner occupied loans, as well.

Failing to tell your lender if you’ll be living on-site—or explicitly lying about your primary residence—to get a different kind of loan product is called occupancy fraud. Not only is this illegal, but it is thought to have had a notable effect on the housing bubble bursting after the 2008 financial crisis.

Say you place an offer on a property that includes four residential units and you choose to finance it. You will have to tell your lender some basic information to receive a mortgage loan. If you would prefer renting the place out rather than living in it, you will need to disclose this, too. Then your lender can evaluate its documents for a non-owner occupied mortgage loan product rather than an owner-occupied mortgage loan. Most likely, your interest rate will be slightly higher to compensate for the additional risk that comes with a non-owner occupied loan.

Do I Need a Non-Owner Occupied Loan?

If you do not intend to live in the property at all, or if you aren’t quite sure if you’ll only rent the property out, you should obtain a non-owner occupied loan. Your lender or your financial advisor can help you decide if there is a benefit to refinancing or classifying your home differently based on any uncommon occupancy situations. For example, if you’ll be living in a home half time and renting part of it to someone, you may want to classify your property differently.

What Does This Mean for Second Primary Residences?

Occasionally, you may want to qualify for an owner-occupied loan even though you have a primary residence already. One qualifying situation is owning two homes so that you can live with family on weekends and have a place to stay somewhere else where you work. Family changes—such as having too many children for everyone to comfortably live in one home or buying a home where an aging relative will live—can also sometimes allow a second primary residence in the same person’s name.

That being said, applying for a government-backed loan like an FHA loan when you already have one primary mortgage means your loan will go through substantial scrutiny. Because occupancy fraud attempts are common, the lender will be checking carefully to make sure you qualify, and you aren’t guaranteed a second loan with those favorable primary-residence terms.

Key Takeaways

  • Non-owner occupied refers to the fact that a property being financed won’t have the owner living on-site.
  • This distinction changes the mortgage loan terms substantially, which has led to homebuyers committing occupancy fraud by lying about where they live as a primary residence.
  • Typically, non-owner occupied loans require a larger down payment, a higher credit score, and a higher interest rate than a primary residence mortgage loan, though this can vary.

Article Sources

  1. New York State Department of Financial Services. "Non-Owner Occupied 1-4 Family Dwellings."

  2. TD Bank. "Buying an Investment Property."

  3. EECU. "Mortgage & Home Equity Line of Credit," See "Non-Owner Occupied."

  4. Police and Fire Federal Credit Union. "Understanding Non-Owner Occupied Mortgages," See "How Much Down Payment Do You Need?"

  5. Consumer Financial Protection Bureau. "Comment for 1026.3—Exempt Transactions," See No. 4. Non-Owner-Occupied Rental Property."

  6. Federal Reserve Bank of Richmond. "The Role of Non-Owner Occupied Homes in the Current Housing and Foreclosure Cycle," See Abstract.